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y David Lew
BEIJING: The Chinese people are increasingly getting entangled in the luster for gold. The Chinese families are on a buying spree of gold ornaments, gold bars, gold coins and gold ETFs. But they are not alone. Chinese mining companies, bullion dealers, gold associations, jewelers and traders are all in the grip of the 'yellow' fever with one aim: buy and trade gold. China, indeed, is in the grip of a gold buying frenzy.

In fact, everything about gold is booming across China. 2009 was a test case for China as far as gold trading was concerned. China is today the largest producer of gold in the world. China is all set to overtake India as the largest consumer of the yellow metal. China is also set to outshine several other countries including India and the Middle East to become the largest trading ground for gold in the world.

A gold buying frenzy is spreading across the Chinese landscape--from cities to rural towns--as you can make out from the words of Xiam Zang, a bullion dealer in Beijing: “Chinese people are buying more gold these days. There are increased sales in jewellery shops for gold ornaments, coins and bars. In fact, many people are now convinced that gold is the best investment asset.”

Zang says as gold sales are rising, “there are increased requests from jewellery shops for supplying them with gold.” “Everyone is doing good business in gold in China. The gold buying spree is not just limited to Beijing or big cities. Even in rural areas, people are simply buying gold despite the high prices,” he added.

The massive rise in gold price in 2009 is the main reason for the Chinese craze for gold buying these days, bullion dealers like Zang points out. Gold price gained by a whopping 50 percent in 2009 from $801 an ounce in January to $1,226 an ounce in December thanks to weak dollar and worsening economic conditions in countries like the United States. Investors in China are hooked on to the forecasts some of which predict that gold price would zoom to $2000 per ounce by the end of 2010.

This increased buying spree is the main reason why China is overthrowing India as the largest gold consumer in the world. India used to be the undisputed leader in gold sales and consumption in the last several decades. But high price of gold coupled with tighter tax regime dampened the demand for gold in India in 2009. India that used to import around 400-700 tonnes of gold every year in the last several years imported only 200 tonnes of gold in 2009—the lowest in the decade.

Look at a report on gold buying frenzy in China from Commodity Online:

China is on a gold buying spree and the rush is set to continue in 2010 also as gold jewellery sales in mainland China and Hong Kong are expected to ramp up. According to market experts, present retail price for gold is HK$10,900 per tael and it could climb to HK$11,000 per tael before Lunar New Year.

Gold sales have risen by 10 per cent this year and are expected to accelerate in the coming two months.

A 20 per cent year-on-year sales growth can be expected before Lunar New Year. The revenue from now till mid-February can contribute up to as much as 30 per cent of the full year sales turnover.

Recent bullion purchases by central banks, including India and China, have fueled shoppers’ sentiment and helped sales during past months. The mainland maintained its position as the top buyer of gold last month. It bought 454 tonnes of gold, topping India and Russia.

The mainland now ranks No 6 in the world in gold holdings, but is expected to continue increasing its reserves to dilute its US dollar asset holdings. The gold price has been edging down to below $1,100 per ounce as the dollar gains strength.

Analysts are bullish on gold performance next year. The price for gold may steady in the short term, but analysts are bullish in the long run. Gold’s average price in 2010 may be around $1,100 per ounce. Both industrial and consumer demand would push gold price even higher next year.

Some years back, China surpassed South Africa as the largest gold producer. Latest statistics from the Ministry of Industry and Information Technology say China’s gold output in the 11 months of 2009 till December 1 was 282 tonnes, an increase of 14.6 percent increase over the same period in 2008.

The report said mining companies expanded output last year after bullion prices soared to record highs, with production in November alone reaching 27.952 tons.

On gold demand in the dragon country, the China Gold Association says that the estimated demand for the precious metal was 450 tons in 2009, up 13.8 percent from 395.6 tons in 2008.

"With household income increasing, Chinese consumers are buying more jewelry and investing in gold assets. All of these are boosting gold demand," said Zhang Bingnan, the general secretary of China Gold Association.Major gold producers in China have also come out with better output numbers. Zijin Mining Group Co Ltd, China National Gold Group Corporation, Shandong Gold Group Co Ltd, Shandong Zhaojin Group Co Ltd and Lingbao Gold Company Ltd together produced 112.19 tons of gold in the first 11 months of 2009, up 13.5 percent from the same period of 2008.

The soaring gold price has also driven up stock prices of gold miners. Zijin, the largest gold producer in China, closed at 9.64 yuan on the last trading day of 2009, marking an almost 50 percent gain in a year.

The changing industry landscape has also helped the industry to make rapid strides. Many of the small mines were merged into the cash rich bigger firms who also have the right technologies to mine low-grade ores. The exercise also helped spur more investments in exploration, said Zhang.

Chinese miners are also eyeing overseas resources to expand their footprint. The latest move is Zijin's $498 million takeover offer for Australian mining company Indophil Resources in November, a deal that will help secure copper and gold mining assets in the Philippines.

In December, another proposal to buy gold mines in the US made by China's Northwest Nonferrous International Investment Co Ltd offer was blocked because the target mine was in the proximity of a military base.

"With household income increasing, Chinese consumers are buying more jewelry and investing in gold assets. All of these are boosting gold demand," Zhang Bingnan, general secretary of China Gold Association told China Post.

Chinese miners are also eyeing overseas resources to expand their footprint to meet the rising domestic demand. The latest move is Zijin's $498 million takeover offer for Australian mining company Indophil Resources in November, a deal that will help secure copper and gold minig assets in Phillippines.

David Lew is a precious metals commentator with Commodity Online. You can contact him at info@commodityonline.com